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Money matters

Tax guidance for freelancers

When it comes to filing of tax returns, Salaried individuals have it relatively easier. Usually, they are reminded about their tax filing and tax saving obligations by the company HR. Even the documentation is taken care of the company, to a large extent: upload their Form 16, enter in a few details and they are done with their taxes.

However, it is not so easy for Freelancers filing taxes as they do not have income coming in from only one source. Freelancers typically work for a number of clients and this is why their taxes might be more complicated. But file they must.

So here are 6 things that Freelancers should keep in mind while filing their income tax:

1. Freelancer from a tax preview

When you earn from an intellectual or manual skill, your income is qualified as ‘Profits & Gains of Business & Profession’. Therefore, from taxation perspective, you have to think of yourself as a businessperson. You have clients the way a business has customers and you have to pay taxes on the income earned from different clients.

2. TDS is deducted from your payment

Every professional service that is rendered by you is subject to 10% tax deducted from source (TDS) for which you can claim refund as well.

3. Claiming expenses reduces tax liability

The expenses that you incur towards your work can be claimed to lower your taxable income. These come under the heads of rent, repairs, depreciation, office expenses, traveling expenses and even meal, entertainment and hospitality expenses.

4. The ITR-4 form applies to you

The Income Tax Return form that freelancers and consultants are required to fill out and submit is ITR-4 and Section 194J is the part of the Income Tax Act that mandates deduction of TDS from payments made for professional services. From AY 17-18 (FY 16-17), professional can opt for presumptive taxation and declare 50% of their gross receipts as their income by filing ITR-4.

5. Choose your basis of accounting

There are two types of accounting methods:

  • Accrual Basis of Accounting (also called Mercantile Basis)

  • Cash Basis of Accounting

Accrual Basis of Accounting

Cash Basis of Accounting

Income is accounted or booked when the right to receive arises

Income is booked when it is actually received

Expenses are accounted or booked when the obligation to pay arises

Expenses are booked when they are actually paid

Tax liability arises when income is booked – tax may become payable when income may not have been received

Tax liability arises in the year income is received – so it makes you pay tax only when income is in your hands.

Approach can be followed for all heads of Income, compulsorily for Heads of Income of Salaries, House Property and Capital Gains.

Only allowed for Profits and Gains from Business and Profession and Income from Other Sources.

Which accounting method should freelancers prefer?

It may appear that by using cash basis of accounting, your tax liability will be reduced. However, the reality is that it may only postpone your tax outgo but you will not be able to achieve a tax reduction as such.

Unless your receipts are very irregular or are very uncertain, it seems more logical to follow the Accrual Basis. Once you choose a method of accounting you are expected to regularly comply with that method. You are not allowed to change the method of accounting often.

6. Advance Tax

If your total tax liability during a financial year exceeds Rs.10,000, you are required to pay taxes every quarter. This is called Advance Tax.

How to calculate advance tax?

  • Add up all your receipts and determine your total income.

  • Subtract expenses directly related to your work.

  • Add income from other sources, say a house property or savings account.

  • Find out the tax slab you belong to and calculate your tax due. (Remember to deduct TDS)

If the tax due exceeds Rs.10,000, you are required to pay advance tax by the following due dates.

Due date for Advance Tax

On or before 15th June

Not less than 15% of advance tax

On or before 15th September

Not less than 45% of advance tax as reduced by the tax paid in the last instalment

On or before 15th December

Not less than 75% of advance tax as reduced by the tax paid till the last instalment

On or before 15th March

The whole amount (100%) of advance tax as reduced by the tax paid till the last instalment

How to pay advance tax?

There are two ways to do it.

  • You can pay online through the I-T Department’s website

  • You can also fill out a paper challan and deposit tax by physically visiting your bank.

You will hardly find any tax planning information that is catered for Freelancers and we hope that you found this information useful. To know more on Tax solutions, visit YES Tax Solutions.

*The full version of this article by our knowledge partner Cleartax can be accessed at

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